One thing that economists often argue for is free trade. It promotes competition, allows greater choice and generates efficiency gains through specialisation to name a few of the advantages. Barriers to trade have gradually been brought down across the global economy, but some do still exist.
Although free trade does have many advantages, there are also arguments for barriers to trade, especially for developing or emerging economies. In some cases, barriers to trade can help a country to develop a particular industry or offer protection to a new sector from the giants of the world. In the case of China, it had a quota system in place since 2009 to restrict exports of ‘rare earth materials’, such as Tungsten and Molybdenum. Many of the hi-tech products that China specialises in require these rare minerals during production and, as the dominant producer of these minerals, Beijing had imposed restrictions on exporting them in an attempt to develop these industries.
However, other countries had raised concerns about the quota system being used, suggesting that by restricting exports of rare earth minerals, China was driving up their price. It was also suggested that the restrictions benefited domestic producers, at the expense of foreign competitors, given that domestic producers were able to access the raw materials at cheaper prices.
A complaint was made to the World Trade Organization in March 2014 by the USA, supported by the EU, Canada and Japan. Following an investigation by a WTO panel, the panel found that China had failed to show sufficiently that the quotas were justified. After an appeal by China, the panel’s findings were upheld in August by the WTO.
In response to the failure of its appeal, China has just announced that it is removing the quotas on exports of rare earth materials. However, this is unlikely to be the end of the story, as other policies may well be imposed, including a resources tax; and an export licence is still required. The following articles consider this battle.
China axes rare earth export quotas Financial Times, Lucy Hornby (5/1/15)
China scraps quotas on rare earths after WTO complaint BBC News (5/1/15)
China ends rare-earth minerals export quotas Wall Street Journal, Chuin-Wei Yap (5/1/15)
China scraps rare earth export controls after losing WTO appeal Bloomberg (6/1/15)
China abolishes rare earth export quotas: state media Reuters (4/1/15)
- What are the benefits of free trade?
- Why do some countries choose to impose protectionist measures and what type of measures can be put in place?
- Using a diagram, explain the impact that export quotas would have on Chinese firms using these rare minerals and also on foreign firms.
- Why have other countries argued that export quotas push up prices of these minerals?
- What other policies might China put in place in order to protect its industries?
The 159 member countries of the World Trade Organisation have reached an agreement on liberalising trade. The deal, which was reached on 6 December 2013 at a meeting in Bali, is the first substantial agreement since the WTO was formed in 1995 (see Timeline: World Trade Organization for other agreements).
It involves simplifying customs procedures and making them more transparent, limited reductions in tariffs and quotas and allowing greater access to WTO members’ markets for exporters. It also permits developing countries to continue subsidising their agriculture in order to promote food security, provided the practice does not distort international trade. According to the WTO:
The trade facilitation decision is a multilateral deal to simplify customs procedures by reducing costs and improving their speed and efficiency. It will be a legally binding agreement and is one of the biggest reforms of the WTO since its establishment in 1995. …The objectives are: to speed up customs procedures; make trade easier, faster and cheaper; provide clarity, efficiency and transparency; reduce bureaucracy and corruption, and use technological advances. It also has provisions on goods in transit, an issue particularly of interest to landlocked countries seeking to trade through ports in neighbouring countries.
In a report published by the Peterson Institute in Washington, it is estimated that the extra trade will add some $960bn to world GDP and create some 20.6m extra jobs. But how fully does it meet the objectives of the Doha Development Agenda, the yet-to-be-concluded trade round started in Qatar in November 2001?
According to the EU’s trade commissioner Karel De Gucht, about one quarter of the goals set for the Doha Round have been achieved in this agreement. This, of course, still leaves a long way to go if all the Doha objectives are to be met. World trade, although now likely to be somewhat freer, is still not free; developing countries will still find restricted access for their agricultural products, and manufactures too, to many markets in the rich world; rich countries will still find restricted access for their manufactured products and services to many markets in the developing world.
A ‘lifeline’ to the world’s poor: Cameron hails WTO historic global trade deal Independent, Kashmira Gander (7/12/13)
Timeline: World Trade Organization BBC News (7/12/13)
WTO Seals Deal for First Time in 18 Years to Ease Trade Bloomberg, Neil Chatterjee, Brian Wingfield & Daniel Pruzin (7/12/13)
WTO agrees global trade deal worth $1tn BBC News, Andrew Walker (7/12/13)
WTO: Government’s tough stand helps clinch deal in its favour Economic Times of India (7/12/13)
India Inc, exporters welcome WTO pact on trade The Hindu, Sandeep Dikshit (7/12/13)
WTO: Pact will help poor Bangkok Post (7/12/13)
WTO overcomes last minute hitch to reach its first global trade deal NDTV Profit (7/12/13)
WTO reaches ‘historic’ trade deal in Bali Aljazeera (7/12/13)
WTO agrees global trade deal worth $1tn BBC News, Karel De Gucht (7/12/13)
Why the WTO agreement in Bali has finally helped developing countries The Guardian, Paige McClanahan (6/12/13)
WTO agreement condemned as deal for corporations, not world’s poor The Guardian, Phillip Inman (7/12/13)
Bali trade agreement: WTO set the bar high but has achieved little The Guardian, Larry Elliott (6/12/13)
Reports and documents
Payoff from the World Trade Agenda, 2013 Peterson Institute for International Economics, Gary Hufbauer and Jeffrey Schott (April 2013)
Days 3, 4 and 5: Round-the-clock consultations produce ‘Bali Package’ WTO (7/12/13)
Draft Bali Ministerial Declaration WTO (see, in particular, Agreement on Trade Facilitation) (7/12/13)
- According to the law of comparative advantage, there is a net gain from international trade. Explain why.
- What are the likely gains from freer trade?
- Is freer trade necessarily better than less free trade?
- Who is likely to gain most from the WTO deal reached in Bali?
- What were the goals of the Doha Development Agenda?
- In what ways does the Bali agreement fall short of the goals set at Doha in 2001?
- Why is it so difficult to reach a comprehensive international deal on trade liberalisation that also protects the interests of poor countries?
- Do you agree with the World Development Movement (WDM) that the Bali Package is “an agreement for transnational corporations, not the world’s poor”?
- Would it now benefit the world for individual countries to pursue bilateral trade deals?
Trade is generally argued to be good for economic growth, as it allows countries to specialise in those goods in which they have a comparative advantage and thus produce and consume more of all goods in total. However, trade inevitably leads to winners and losers, especially as countries impose tariffs on imports in order to protect domestic industries. This has been the case in the banana industry.
Banana growers in the former European colonies have long been protected by EU tariffs, helping to prevent competition from their Latin American banana growers. But, now things could be about to change. In December 2009, most of the nations concerned reached an agreement in Geneva for tariffs imposed by the EU to be gradually reduced.
The European Union had imposed no duty on bananas from their former colonies, but had imposed tariffs on banana imports from other countries. This meant that those countries now benefiting from zero import duty could sell their bananas for a much lower price, therefore restricting the other nations (who did have to pay an import duty) from competing effectively.
With the World Trade Organisation in attendance, an agreement was signed that puts an end to this trade dispute dating back over 2 decades. The Director General of the WTO, Pascal Lamy said:
‘This is a truly historic moment … After so many twists and turns, these complicated and politically contentious disputes can finally be put to bed. It has taken so long that quite a few people who worked on the cases, both in the Secretariat and in member governments have retired long ago.’
This trade war has been ongoing for many years and this agreement represents a big step in the right direction. With a fairer playing field in this banana market, countries in Latin America will now be much more able to compete with other nations. As economists argue that trade is good, a reduction in protectionist measures should be seen as a good thing and will benefit the countries concerned. The following articles consider this trade resolution.
Banana war ends after 20 years BBC News (8/11/12)
WTO: Historic signing ends 20 years of EU-Latin American banana disputes 4-Traders, WTO (8/11/12)
EU, Latin America nations mark end of ‘banana war’ Fox News (8/11/12)
Banana war ends after 20 years The Telegraph (9/11/12)
Infamous banana dispute ends Sky News (9/11/12)
- What is comparative advantage and how does it lead to gains from trade?
- How does a tariff help protect a country’s domestic industry?
- Using a diagram, illustrate the effect of a tariff being imposed on banana imports from Latin America. Is there a cost to society of such a policy?
- Now, show what happens when this tariff is removed by the EU. Who benefits and who loses?
- What is the role of the World Trade Organisation?
- How does a tariff affect a country’s ability to compete with other nations?
International economists have long advocated the advantages of free trade. By boosting competition, increasing choice and market size, trade has long been seen as an engine of growth and efficiency.
For many years, tariffs and other restrictive trade practices have been removed on trade between both developed and developing countries and many rounds of negotiations have taken place, with mixed results.
The World Trade Organisation (WTO) plays a key role in trade negotiations and has the main aim of liberalising trade. The organisation requires its members to operate according to a variety of rules, including the prohibition of quotas and the inability of countries to raise existing tariffs without negotiating with their trading partners.
If any country breaks a trade agreement, the WTO can impose sanctions. A current case that has been referred to the WTO for ‘consultation’ concerns Argentina. Argentina has imposed various import restrictions on trade, such as import licensing and a requirement for countries to balance its exports and imports.
A number of WTO members recently expressed their concerns about these restrictive trade practices. The EU trade commissioner Karel de Gucht said:
Argentina’s import restrictions violate international trade rules and must be removed. These measures are causing very real damage to EU companies – hurting jobs and our economy as a whole. … Argentina’s trade policy has become rooted in unfair trade practices.
Argentina has said that it was expecting the move from the EU, but claims that its protectionist measures are there to support and re-industrialise the country. This case is unlikely to be resolved any time soon and while the ‘restrictive trade practices’ remain in place, EU companies trying to export to Argentina will find barriers, such as a requirement for all imports to receive pre-approval.
The effects of these restrictions have already been felt, with EU exports to Argentina down by 4% in April this year, compared with the same month last year. The following articles consider this issue.
EU takes Argentina trade fight to WTO France 24, (25/5/12)
EU files WTO suit over Argentina’s import restrictions Reuters, Sebastien Moffett and Tom Miles , (26/5/12)
EU escalates dispute with Argentina Financial Times, Peter Spiegel and Joshua Chaffin, (25/5/12)
EU refers Argentina’s import restrictions to the WTO BBC News (25/5/12)
EU steps up challenge to Argentina’s policies Wall Street Journal, Matthew Dalton (25/5/12)
- What are the rules governing the members of the WTO?
- What are the advantages of free trade?
- To what extent should emerging economies be allowed to impose protectionist measures to help support their economies?
- What action could the EU take in response to the ‘restrictive trade practices’ imposed by Argentina?
- What is import licensing?
- How will the import restrictions affect EU companies and the growth of the EU as a whole?
In October 2004, the USA lodged a complaint with the WTO. The claim was that the EU was paying illegal subsidies to Airbus to develop new aircraft, such as the superjumbo, the A380. This provoked a counter-complaint by Airbus, claiming unfair subsidies for Boeing by the US government since 1992. In July 2005, two panels were set up to deal with the two sets of allegations.
A ruling on the US claim was published on 30 June 2010. The WTO found Airbus guilty of using some illegal subsidies to win contracts through predatory pricing. For example, some of the ‘launch aid’ (LA) for research and development was given at below market rates and hence violated WTO rules. Also the provision of infrastructure and infrastructure grants for runways, factories, etc. also violated the rules. However, the WTO dismissed some of Boeing’s claims, as many of the subsidies were reimbursable at commercial rates of interest.
We still await a ruling on the EU’s complaint against US support for Boeing. This is due later in July.
WTO backs Boeing in Airbus dispute Financial Times, Joshua Chaffin and Jeremy Lemer (30/6/10)
FACTBOX-Subsidies and the WTO – issue at heart of Airbus case Reuters (30/6/10)
Q&A-What next in the Airbus dispute? Reuters (30/6/10)
TIMELINE-Key dates in Airbus subsidy dispute Reuters (30/6/10)
EU Airbus subsidies illegal, says WTO BBC News (30/6/10)
Boeing and Airbus row ruling to be made public BBC News, Richard Scott (30/6/10)
European loan rates to Airbus illegally low, says WTO Europolitics, Chiade O’Shea (30/6/10)
Airbus Subsidies From Europe Are Ruled Improper New York Times, Christopher Drew (30/6/10)
Airbus-Boeing Rivals May Benefit From Spat Aviation Week, Madhu Unnikrishnan (28/6/10)
WTO issues panel report on Airbus dispute WTO (30/6/10)
Data on orders and deliveries
Competition between Airbus and Boeing (orders and deliveries) Wikipedia
- What is meant by ‘predatory pricing’?
- Which subsidies were found to be illegal by the WTO? What was it about them that violated WTO rules?
- What is Airbus’s complaint against Boeing?
- How might strategic trade theory be used to justify subsidies given to Airbus?
- In what ways might the disputes between Boeing and Airbus benefit other aircraft manufacturers?